What Is the Federal Reserve (Fed)? Definition, Role, and Impact on Global Markets

Definition:
The Federal Reserve, often called the Fed, is the central bank of the United States. It manages U.S. monetary policy, regulates banks, and plays a critical role in global financial stability.

Explanation:
Established in 1913, the Federal Reserve is responsible for maintaining the stability of the U.S. financial system and influencing the supply of money and credit. Because the U.S. Dollar (USD) is the world’s primary reserve currency, Fed policy decisions affect not only the U.S. economy but also financial markets worldwide.

The Fed has a unique structure:

• Board of Governors in Washington, D.C. (7 members)
• 12 Regional Federal Reserve Banks across the U.S.
• Federal Open Market Committee (FOMC): Decides on interest rates and monetary policy

📊 Key Functions of the Federal Reserve

1. Monetary Policy: Setting interest rates and controlling money supply
2. Financial Stability: Acting as lender of last resort in crises
3. Supervision & Regulation: Overseeing banks and financial institutions
4. Payment Systems: Ensuring smooth operation of the U.S. payment network
5. Issuing Currency: The Fed manages the circulation of the U.S. Dollar

🕰️ Historical Context

• 1913: Federal Reserve Act created the Fed
• 1930s (Great Depression): Expanded role in financial stability
• 1971: Post–gold standard era, Fed gained more influence over USD
• 2008 Financial Crisis: Massive interventions with quantitative easing (QE)
• 2020 COVID-19: Emergency rate cuts and liquidity programs

🌍 Impact on Global Markets

• Forex: Fed interest rate decisions directly move the USD (part of ~90% of trades)
• Bonds: U.S. Treasury yields depend heavily on Fed policy
• Stocks: Rate hikes often pressure equities, while cuts boost them
• Commodities: Gold and oil often react to Fed policy as hedges or growth signals

Example (Trading):
If the Fed raises interest rates, the USD usually strengthens (e.g., EUR/USD falls), U.S. bond yields rise, and gold may decline.

Related Terms:
Central Bank, FOMC, Interest Rate, Monetary Policy, Quantitative Easing, USD

Category:
Financial Institutions / Macroeconomics

✅ FastPip Tip:

Always follow the FOMC meeting schedule—Fed statements and press conferences are among the most market-moving events in Forex and global markets.

📣 Related Resources from FastPip

✅ Get Forex Signals aligned with Fed rate decisions
✅ Copy macro traders on our Copy Trading Platform who follow Fed policy
✅ Read in-depth Fed analysis on our Blog